British Pound Drops Despite UK Inflation Beating Estimates

2017-05-16 09:03:00 Oliver Morrison, Analyst

Talking Points

- UK inflation reaches the BoE target of 2.7%.

- But the data fails to lift Pound crosses.

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UK inflation as measured by the Consumer Price Index rose to 2.70% in April – reaching the Bank of England’s target – beyond analysts’ expectations of a jump to 2.60% and last month’s 2.30%. Core CPI climbed to 2.4% in April, again beyond the 2.3% estimate and rising above the BoE’s desired 2% level for the first since time late 2013.

You would expect rising inflationary pressures in the UK to revive the BoE hawks, and therefore be Pound positive. However, the data have as yet failed to breathe any life into Pound crosses. Traders are possibly of the view that inflation is still not rising quickly enough, given that Mark Carney and Co warned in last week’s quarterly inflation report that it expects that rising inflationary pressures will begin easing next year. The Bank has also long been looking through any inflation rises, which it has put down to the post-Brexit drop in the value of Sterling, to focus on growth and wages and seems firmly entrenched in wait-and-see mode despite firming price growth.

GBPUSD has dropped post the data release, once again faling to breach that psychologically-important 1.30 level versus the Dollar. This is despite the Dollar slipping back against other major currencies as weaker US data dents rate-hike expectations and on the news today that President Donald Trump revealed highly classified information about so-called Islamic State to Russia's foreign minister.

GBPUSD Chart (15-Minute Intraday)

Chart by IG

Sterling also remains under pressure against a strong Euro, which has gained 0.5% this morning to $1.1027, as traders anticipate today’s Euro-Zone GDP report at 10am GMT. The Euro hit a six-month high versus the Dollar in early Tuesday trading.

The muted GBP reaction means the FTSE 100 is likely to remain strong. The FTSE 100 hit a fresh high in early Tuesday trade ahead of the UK inflation data. Its rally has been fuelled by a combination of rising commodity prices and the $900 billion ‘Silk Road’ infrastructure plan in China.

EURGBP Chart (15-Minute Intraday)